Don’t Gamble on Caesars Despite the Climb

The stock is soaring, but fundamentals are weak

About a year ago, Caesars Entertainment (NASDAQ:CZR) pulled off a curious IPO. The company issued a measly 1.8 million shares at a price of $9 … and that small slice certainly helped spring-load the debut. The inital gain was a sizzling 71%.

The move to go public, though, was actually more about allowing Caesar’s investors — like Paulson & Co., Blackstone Group (NYSE:BX) and Goldman Sachs (NYSE:GS) — to cash out. As a result, the company’s stock price has been fairly miserable since the deal hit the market … until now.

The bad memories seem to be fading away, as Caesar’s shares have been rocketing this week. The stock has surged an eye-popping 33% so far today, while total gains over the past five days total more than 65%.

Why the bull move? Well, there are actually three simple reasons.

First is that Caesars plans to issue $1.5 billion in debt at a principal amount of 9%. While it seems a bit onerous, the deal will actually refinance existing debt that has higher rates. The company’s total long-term obligations are nearly $23 billion, a large part of which was the result of a mega going-private transaction back in 2008.

Next, Caesars preannounced its fourth quarter earnings. The company expects to generate revenues of $1.55 billion to $1.58 billion, with EBITDA of $325 million to $365 million. That’s below the consensus of $2.11 billion in revenues and $434.6 million in EBITDA, but the results take into account the impact of Hurricane Sandy. The miss is likely a short-term issue.

The biggest cause of the rally, though, is probably Caesars’s plan to spin off Planet Hollywood in Vegas, the virtual assets and a project in Baltimore. It’s not clear what these assets will fetch, but it could be substantial … and that money could go to help pay down Caesars’ debt.

That’s good news, of course, but investors should still be cautious. The fact remains that the U.S. gambling market is highly competitive and, with state budgets under pressure, there has been strong growth in gambling licenses.

Something else: Unlike Wynn Resorts (NASDAQ:WYNN), MGM Resorts International (NYSE:MGM) and Las Vegas Sands (NYSE:LVS), Caesars does not have a presence in Asia. In fact, the company gets roughly 95% of its revenues from the U.S. market.

While the company may have some positive catalysts — especially with the proposed spin-off — the underlying fundamentals look weak. For investors, it’s probably not a good idea to make a bet on Caesars right now.

Based in Silicon Valley, Tom Taulli is in the heart of IPO land. On a regular basis, he talks with many of the top tech CEOs and founders trying to find the next hot deals and finding out which start-ups are stinkers.

A long-time follower of the IPO scene, back in 1999 Tom started one of the first sites in the space called WebIPO. It was a place where investors got research as well as access to deals for the dot-com boom. Tom also wrote the top-selling book, Investing in IPOs. In it, he covers all the aspects of analyzing an IPO, such as reading the prospectus, detecting the risk factors and understanding some of the arcane regulations. But don’t worry — if that process is too intimidating for you, thankfully Tom will do the legwork for you right here in the IPO Playbook blog.

Tom is routinely quoted in the media about upcoming deals with his interviews on CNBC and Bloomberg TV, but he is eager to take your questions too. You can message him on Twitter at @ttaulli. And feel free to weigh in via the comments section on any of his IPO Playbook posts.